Ship orderbook build up worrying
Over the past few months, container liners have ordered significant amounts of tonnage, with CSCL, UASC and MSC joining Maersk in the 18,000 teu stakes. Our expectations of balance between effective supply and demand growth in 2015 is now at risk of being derailed.
We maintain our sector Neutral call with our top Outperform picks in OOIL and SITC given their relative defensiveness in a volatile sector. CSCL remains Neutral, while NOL is an Underperform. We have not changed our forecasts or target prices in this report. Freight rates and share prices may rise closer to year end with seasonal restocking.
Over the first eight months of 2013, a total 1.34m teus of newbuilding vessels were ordered, against just 0.4m teus ordered in 2012. At this rate, full-year 2013 orders are likely to exceed the 1.8m teus ordered during 2011, which was the highest since the 2008/09 GFC. There is a clear effort by many container shipping companies to catch up with the standards and sizes ordered by Maersk, the world number one.
What We Think
The consequences of the ordering for the supply-demand balance in 2015-16 are very negative. After incorporating the latest newbuilding orders, the balance between effective supply and demand growth in 2015 is at risk of being derailed if there are any further orders. This means that the present oversupply in the system will continue to accumulate and is unlikely to be reduced anytime before 2016/17 at best. As such, freight rate volatility will remain entrenched.
What You Should Do
Spot rates are presently weak as the weak peak shipping season comes to a close and as China prepares to celebrate its national day in early October. For the 3Q13, container shipping companies should report better qoq earnings, but likely worse yoy. We expect demand and freight rates to tail off until we approach the year-end and pre-Lunar New Year restocking in December/January, which usually has a positive impact on rates and share prices. If carriers implement a strong winter capacity rationalisation plan, and if demand surprises on the upside, the rate movements will be augmented.
Publish date: 26/09/13